Must we continue to provide childcare vouchers to employees on maternity leave?
You may provide your staff with childcare vouchers as a benefit of their employment and to support them with the costs of caring for a young family.
You may, like many employers, provide your staff with childcare vouchers as a benefit of their employment and to support them with the costs of caring for a young family.
Such schemes have significant tax and national insurance advantages for both the employer and the employee. However, there is often confusion about the status of childcare vouchers and an employer's obligations surrounding the operation of a voucher scheme.
In the case of Peninsula Business Services v Donaldson the Employment Appeal Tribunal held this month that childcare vouchers provided under a salary sacrifice scheme were part of the employee’s ‘remuneration’ (rather than a non-cash benefit). This meant that it was not unlawful for the employer to discontinue provision of the vouchers whilst the employee was on maternity leave.
Peninsula Business Services operated a childcare voucher scheme under which employees could receive vouchers through a ‘salary sacrifice’ arrangement. It was a condition of entry to the scheme that the employer could suspend provision of the vouchers during maternity leave.
The Claimant, Mrs Donaldson, was pregnant and wanted to join the scheme. However, she did not do so as she considered the terms of entry to be discriminatory. She claimed pregnancy and maternity discrimination under the Equality Act 2010 and also brought a claim of indirect discrimination.
The Employment Tribunal that first heard the claim agreed that it was discriminatory for Peninsula to make entry into the scheme conditional on accepting that the vouchers would not be provided during periods of maternity leave. It held that, while employees are not entitled to remuneration during maternity leave, they should continue to receive all other ‘non-cash benefits’. The Tribunal applied HMRC Guidance (which stated that childcare vouchers should be classed as a non-cash benefit) and held that suspending provision during periods of maternity leave was discriminatory.
What did the EAT decide?
The EAT disagreed with this view. It analysed various pieces of applicable legislation together with the HMRC guidance and held that childcare vouchers should be regarded as an aspect of an employee’s ‘remuneration’. As such, it was not discriminatory for the employer to discontinue the vouchers during maternity leave.
The EAT held that childcare vouchers were not a ‘benefit’ provided by employers in addition to salary. Rather, childcare vouchers provided by way of salary sacrifice were a ‘diversion’ of the employee’s existing salary used to purchase the vouchers. The employer effectively ‘redirects’ money which would have gone into the employee’s take-home’ pay into the hands of the voucher provider.
Peninsula paid only statutory pay during periods of maternity leave. No deductions are permissible from statutory maternity pay. Therefore, during maternity leave, the Claimant would not be earning any salary to ‘sacrifice’ in return for vouchers. The EAT held that requiring voucher schemes to be continued during maternity leave would impose a further cost employers on top of statutory pay. It decided that Parliament could not have intended this.
What does this mean for our scheme?
Prior to this decision the consensus was that childcare vouchers were not remuneration and therefore were a benefit which must continue during maternity leave.
On the face of it, this Judgment reverses this position and means that you could stop salary sacrificed childcare vouchers for those on maternity leave, at least when they are receiving nil pay or prescribed rate statutory maternity pay.
However unhelpfully the EAT stated they have some reservations about whether they had all the material needed before them to make this decision. This decision is also entirely contrary to HMRC guidance, which was dismissed by the EAT as having ‘no legislative force’.
Together, these factors cloud what at first appears a clear message. We would suggest that you may understandably be reluctant to take the bold step of making changes to your scheme on the basis of a Judgment that is so tentatively expressed and contrary to HMRC guidance.
In many ways, the specific facts of this case were relatively simple as Peninsula provided statutory maternity pay only. If your organisation operates an enhanced maternity pay scheme, the application of this Judgment to your staff may be far more complex.
The rather surprising rationale behind this decision is that childcare vouchers are ‘remuneration’ (which can therefore be stopped during maternity leave). During periods of maternity leave, where an employee is receiving full or even half pay they still earn ‘salary’(in excess of statutory minimum pay) which can be ‘sacrificed’. Therefore, arguably/probably, you might be obliged to continue to provide childcare vouchers during these periods.
It is only in a period of prescribed rate SMP or nil pay when the vouchers could be withdrawn altogether based on this Judgment without further argument. Of course, however, the relative costs to you of maintaining a voucher scheme will be less when an employee is receiving enhanced pay (which can be diverted to pay for vouchers) than if they have dropped down to statutory pay or nil pay.
Before making any changes, you do also need to check what you have said and committed to contractually and also in your policies and procedures about maternity and childcare vouchers. There is a possibility that you have made commitments which amount to a contractual right or that your practice has become a contractual right by custom and practice.
It is important to note that this decision probably does not apply to childcare vouchers that are provided in addition to salary, rather than through salary-sacrifice. These are much more likely to be classed as a non-cash benefit that must continue to be provided during maternity leave.
Rather than making any cost-saving changes in haste you may wish to wait to see ‘how the dust settles’ on this case. It is of course also important to consider any employee-relations issues that cutting back provision during maternity leave might cause. News that childcare vouchers are to be withdrawn during maternity leave might come as an unwelcome shock to a pregnant employee contemplating how they will ‘get by’ on statutory pay.
In any event, as part of the recent Spring Budget, the Government announced that the existing childcare vouchers system will be closed to new entrants in April 2018 and will be replaced with a centrally administered system of tax free childcare. However, you can continue to operate a childcare voucher scheme for existing members for as long as you wish. It is important to factor in the decision in this case when considering the future of your scheme.
Phil Allen (email@example.com) is a Partner in the Employment, Pensions and Immigration Team and is based in Manchester. If you would like to explore further the implications of this decision for your organisation please do not hesitate to get in touch or speak to your usual Weightmans contact.